Wednesday, May 5, 2010

The Coming Financial Storm Part 2

I have heard a lot in the news lately about how the “teacher” pension fund will bankrupt school districts across the nation. The simple fact is that there is a crisis in Pennsylvania with the pension fund, but I think it is important to understand how the pension fund got into such a dire situation. I think it is important to know some simple facts about what employees are included in the pension fund (at least as I understand it). The pension fund (the Pennsylvania Public School Employees Retirement System), includes teachers, all support staff, state employees (and interestingly enough) Pennsylvania law makers. There are over 600,000 members (both active and inactive) currently in the pension system. For educators, the benefits include a “multiplier” of 2.5%. What this means is that once a retiree reaches full retirement age (62 years old or 35 years of service) they will receive a pension payment based on the following formula: number of years in service X 2.5, this number is then changed to a percentage. The next calculation is the average salary of the last three years of work for a retiree. Once that number is calculated, the percentage from the first calculation is applied and that is what the retiree will receive. So, for example, if a retiree is at full retirement, you multiply 35 (years of service) X 2.5 which equals 87.5. If the average salary over the last three years of service was $60,000, then calculation is 87.5% of $60,000, which is $52,500. This is what the retiree would receive in benefits. I will not get into more of the rules and penalties that are involved if someone does not reach full retirement, but suffice to say that there are penalties if one does not reach full retirement age. I believe the multiplier for state lawmakers is 3.0. So now that you understand a little bit more about what the benefits are, how did the state get into the current crisis?

The pension is funded in two ways: employee contributions and employer contributions. The employee contributes a percentage of their income to the fund and the employer contributes a percentage of the employee’s income to the fund also. The State then reimburses the local school district for half of their contributed amount. For employees within the school system, the rate of their contribution is 7.5% if you were employed after 1983 and 6.25% if you were employed before 1983. Employees have actually contributed more to the fund since 1999. The percentage that the employers contribute has fluctuated greatly over the past ten years. This fluctuation is where (I believe) the crisis has its start. State lawmakers determine what the percentage will be that the employers will contribute. This chart provides historical data showing that in 1997-1998 a drastic decrease in employer contributions started to occur. Again, this was a policy change made at the State level. It is also obvious to anyone who has tried to balance a checkbook, that if you put less money into your account eventually you will run out of money or you will have to start putting more money into the account. For awhile, PSERS investments were doing so well that those earnings masked the fact that the contribution rate was decreased. However, with the economic downturn, those investments are not doing as well. This is the risk one takes when you rely on the “magic” of the market for your income. To make up for the years when policy makers felt that the employers did not have to contribute much money to the system, school districts are now going to have to make up for that lack of contributions. The percentage rates that the school districts will have to contribute (remember half of that is reimbursed by the State) will increase dramatically over the next few years. This increase will have a distressing effect on school budgets across the State. For Ridgway, the district anticipates a $500,000 dollar increase in our share of the pension contribution.

I hear policymakers want to blame the school districts for “giving up the store” as far as benefits for their employees. However, as you can see from this blog, policy making at the state level (as determined by employer contribution rates that school district are required to follow) has played a big part in the pension crisis that will occur over the next few years. The pension crisis is another piece to the puzzle that will impact how education is provided to our communities. I am excited to work through these problems and look forward to improving the educational services for our students and community.